Discuss the view that protectionist policies should be introduced to protect UK firms - new specimen 2 2015

Question 1

Intro

Answer 1

• Protectionist policies are government policies which restrict international trade, often to help domestic industries.
• Now, production within the UK has recovered from the Covid pandemic, with monthly GDP now estimated to be just 0.3% below pre COVID levels.
• However, there are still some supply chain issues, which can slow down production in industries which are reliant on imports of certain raw materials.
• The implementation of protectionist policies, such as tariffs and quotas, could be beneficial for the UK economy, particularly if international competition is high.
• However, there are also merits to not using protectionist policies, and adhering to free trade.

Question 2

Pros

P1 - Tariffs

Answer 2

• Tariffs – A tariff is a tax on import, which will increase the domestic cost of purchasing foreign goods, hence incentivising domestic consumers to purchase UK-produced goods instead.
• Pros: - Increased Revenue: Tariffs can generate revenue for the government by levying a tax on imported goods. This revenue can be used to finance various public goods and services. This can be shown by area E on the diagram.
• Protection of Domestic Producers: Producers benefit initially from an import tariff - they are protected from lower priced imports and can expect an increase in output at a higher price, which increases their revenues and operating profits. (Producer Surplus goes from C to C+G)

Question 3

Cons

P1 - Tariffs

Answer 3

• Cons: Consumers face higher prices after the tariff - leading to a fall in real incomes. May affect lower income households more, so some may argue that implementing a tariff would be a regressive policy.
• There is also a loss of choice. (There is an overall decrease in Consumer Surplus from (A+B+C+D+E+F to A+B)
• There could be a loss of efficiency - D = Productive inefficiency (the efficiency loss that comes about from less efficient domestic producers being able to produce the good, due to the tariff artificially raising the price in the home market). (Area D) and F = allocative inefficiency (the welfare loss that comes about by some consumers now being priced out of the market, due to the tariff artificially raising the price in the home market). (Area F)

Question 4

Pros

P2 - Quota

Answer 4

• A quota is a government-imposed limit on the quantity of a particular good/service being imported within a particular time period, hence increasing the market available to domestic producers.
• Pros: Domestic producers are better off. The increase in the price of their product increases producer surplus in the industry. The price increase also induces an increase in the output of existing firms (and perhaps the addition of new firms) via incentive function, an increase in employment, etc.
• Auctioning of quotas to the highest bidder can lead to an increase in revenue, which can help mitigate the negative effects of the quota on the economy.

Question 5

Cons

P2 - Quota

Answer 5

• Cons: The value of a quota (quota rent) goes to foreign producers if they can sell at higher prices, making more revenue per unit so it is an advantage for foreign producers.
• The restriction on imports leads to excess demand at the prevailing price (determined by world supply).
• This shortage leads to a rise in price, until the difference between quantity demanded and quantity supplied domestically is equal to the size of the import quota. Consumers are worse off. Consumers buy fewer units, and the increase in the domestic price of both imported goods and the domestic substitutes reduces consumer surplus in the market.

Question 6

Pros

P3 - Free trade

Answer 6

• Free trade is when goods and services can be traded within a particular region without any protectionist measures. Pros: Ricardo’s comparative advantage, where a country specialises in goods which they have the least opportunity cost in producing.
• Specialisation can increase the likelihood of firms being able to benefit from Economies of scale – with an increase in the market size and therefore increased demand, firms can exploit economies of scale, and maybe improve their productive efficiency. Multinational corporations (MNCs) can move their factories etc. to countries with lower wage costs, thereby reducing their costs.
• Lower prices for domestic consumers – a key gain from trade is the ability to buy goods and services at a lower price than the domestic one. Consumers can buy less expensive products and producers are able to buy less expensive raw materials.

Question 7

Cons

P3 - Free Trade

Answer 7

• Lack of Protection for Domestic Industries: Free trade policies do not provide protection to domestic industries, which can be vulnerable to foreign competition. Some economists argue that this loss of competitiveness and efficiency is actually a positive thing for the world economy, as it drives what is known as “creative destruction.” This refers to the process by which new and more efficient firms replace older and less efficient firms, leading to overall economic growth and development
• Infant Industry Argument: Free trade policies can be harmful to infant industries, which are still in the early stages of development. These industries may not yet be competitive with established foreign firms and may require protection in order to grow and mature.

Question 8

Draw and describe a qouta diagram

Answer 8

• You don’t need to draw P1, B, Q1 necessarily. (That’s where the equilibrium would be with no external trade, assuming the country saves money by trading)
• P2 goes up to P3
• At P3, Q5-Q4 is imported, reducing from Q3-Q2 so there are less imports
• Increase of domestic production from Q3 to Q5
• Consumer Surplus pre-quota + area ADP2
• Consumer surplus post-quota = area AGP3
• Producer surplus pre-quota = P2EC
• Producer surplus post-quota = area P3FC